Question

SIROM Scientific Solutions has $10 million of outstanding equity and $5 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk premium is 9% and the risk-free rate is 3%, compute the weighted average cost of capital if the firm’s tax rate is 30%.

Answer 1

Answer:

15.167%

Explanation:

For computing the WACC we need to do the following calculations which are shown below:

Cost of equity = Risk free rate + Beta × Market risk premium  

= 3% + 2 × 9%

= 21%  

After tax cost of debt = Cost of debt ×  (1-Tax Rate)

= 5% × (1 - 0.30)

= 3.50%

Now

WACC = Weight of debt ×  Cost of debt + Weight of equity × Cost of equity

= 5 ÷ 15 × 3.50 + 10 ÷ 15 × 21

= 1.167% + 14%

= 15.167%